Service Business Income Statement Revenue - Expenses -------------------------- Net Income

Merchandising Business Income Statement Revenue - Cost of Goods Sold ------------------------------- Gross Profit - Expenses -------------------------- Net Income

Periodic Inventory System Accurate financial records only when physical inventory is taken. Time Consuming Easy to do

So far… Final inventory is included on the balance sheet. COGS figure is included on the income statement. COGS is calculated from the ending inventory figure. The ending inventory figure is found through a physical inventory.

Purchases We may start the year with 5 cans of coke. What if we want to have 10 cans of coke available for sale? We have to ‘purchase’ 5 more cans.

-------------------------------- Goods Available for Sale So: Beginning Inventory +Purchases -------------------------------- Goods Available for Sale We’ll use this after, and subtract the ending inventory … giving us the COGS

mr. potato head beginning inventory purchases Available for sale?

available for sale ending inventory How many were sold?

Keeping Track of Purchases We keep track of inventory purchases in an account called ‘Purchases.’ There are also another cost ‘Freight-In’ that we will often be charged when puchasing inventory. We keep track of this too. Purchases 200- Cash 200- Freight-In 45- Cash 45-

Step by step…. Beginning Inventory: $1000 + Purchases: $ 1000 + Freight In: $500 And we take inventory, finding we have $400 worth of goods left. COGS = ?

-------------------------- Cost of Goods Sold (COGS) Note: COGS Opening Inventory + Purchases + Freight In ($$) - Closing Inventory -------------------------- Cost of Goods Sold (COGS) ** Please complete the chart on page 434 of your workbook! **

Depreciation Revisited… 50% rule: 50% of an item’s yearly depreciation will be taken in the year it is purchased. (and it doesn’t matter when it was purchased!) eg. $10,000 item: no salvage, 10 year life. 10,000/10 yrs = 1,000 per year. depreciation taken in first year? ____________

ex. 2 (declining balance) The same 50% rule applies! $10,000 item. 20% declining balance. First year depreciation: $2,000 (with 50% rule) = $2,000*.5 = $1,000

Please copy and complete the following table… After completing the table, do the required adjusting journal entries.